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Using Frugal Business Model, Orphagen Targets Orphan Receptors

The decline of venture capital investments in life sciences startups has provoked a lot of angst in the U.S., with many experts predicting a shortage of new drugs for the pharmaceutical product pipeline.

Life sciences startups typically require hundreds of millions of dollars before they can show that an experimental drug might work in clinical trials with real patients. But San Diego’s Orphagen Pharmaceuticals runs against the conventional wisdom. As a case study in frugality, Orphagen has survived as an independent drug discovery company for over a decade, scraping by on grants and one crucial pharmaceutical partnership while enduring a mixed bag of challenges, risks, battles, and rewards.

Orphagen CEO and founder, Scott Thacher, says he believes the freedom to explore and rapidly respond to discoveries makes their independent research path worth the extra adversity.

The company, with fewer than 10 employees, aims to discover molecules that bind and regulate so-called orphan nuclear receptors—a high potential field with a lot of interest in academia. Yet Orphagen is focused on a stage of discovery that many consider as “too early” for venture capital. So why did Thacher position the company as a translational lab, outside the resources of an academic institute?

Scott Thacher

“You do different things in different environments,” Thacher says. “Incentives really aren’t there in pharma to do high-risk, early stage work, and the incentives aren’t there in academia to do the high-risk translational work.”

For Thacher, “the whole concept of a small company is exciting,” He says a staff of 8-10 is ideal for ingenuity and invention. “In our small company, our backs were against the wall. We had to find compounds for these unexplored orphan receptors, there was nothing else we could do.” In terms of production, he says startups are uniquely compelled to generate new value. “There really is a big focus on invention, versus marketing and development.”

Still, it hasn’t been easy. Orphagen began operating in 2003, with funding from three federal Small Business Innovation Research (SBIR) grants Thacher had written, after he resigned as a research investigator at Allergan. He retains a hand in guiding Orphagen’s science strategy, but he has spent the bulk of his tenure as CEO building a large network of support to draw on for technology and expertise.

Their first laboratory space was sublet from the Human BioMolecular Research Institute, a nonprofit founded in San Diego in 1997 to conduct biomedical research to understand and ameliorate human diseases and disorders related to the central nervous system. Thacher says his team used screening equipment that was purchased for about $100,000; “that was one of the preconceptions I had to get over, which was that you needed $10 million dollars to do screening.” It wasn’t highly automated, but adding a few manual steps to the process reduced the upfront costs and kept Orphagen’s scientists on top of screen quality, a critical variable to finding new compounds for the orphan receptors.

Later on, Vencore, a venture leasing company, provided an $80,000 leasing line for capital investment. “You have these circles of people that believe in you,” Thacher says. Indeed, Orphagen also negotiated about $350,000 worth of chemistry work on a deferred basis, which was repaid with earnings from a pharmaceutical partnership they signed the following year.

Conducting an independent scientific program also has been challenging. Thacher describes Orphagen as “disease agnostic.” They have followed their molecular discoveries to the biology of various autoimmune diseases, retinitis pigmentosa, Cushing’s syndrome, and even circadian rhythms.

It’s an unorthodox approach, and compiling expertise in different areas has required ongoing collaborations. “We’re constantly reaching out to people in academia to get technology and ideas,” Thacher says. A lab at UC San Francisco gave practical help designing necessary assays; others shared theoretical advances and advice on selecting mouse models. Despite going it alone, Orphagen is embedded throughout the drug discovery ecosystem.

Splitting the focus of their lab across a range of orphan nuclear receptors would not be possible in an academic setting, nor would it be endorsed by outside investors, who are compelled to pick winners. Yet Thacher maintains there are benefits to a broad approach. “In an industrial setting like ours you are going after multiple targets, so you are constantly learning things by comparing them with each other,” Thacher says. “You can be more effective.”

Orphagen’s track record appears to back that up. From 2005, the initial team of three scientists began finding “hits”—molecules that bind and stimulate a specific receptor. One group of hits targeted ROR-γt, an orphan nuclear receptor shown to activate and sustain TH-17 immune cells, a specific type of T-cell suspected of driving a range of autoimmune diseases, including psoriasis and rheumatoid arthritis.

A drug that inhibits RORγt has the potential to suppress activation of the TH-17 cells, while leaving the remainder of the immune system intact. Based on such promise, Orphagen negotiated its first partnership in 2008, with Japan Tobacco. This was also the industry’s first collaboration to develop compounds targeting ROR-γt.

Orphagen’s deal capitalized on excitement surrounding the field—Orphagen didn’t have a definitive clinical candidate in 2008, but neither did four rival companies that struck similar deals in subsequent years. After surviving for five years on government grants and artful scrounging, the Japan Tobacco deal was a windfall for Orphagen.

Orphagen CEO Scott Thacher (left) and Paul Crowe, director of biology, last year in Japan

Thacher would not disclose specifics about Orphagen’s 2008 contract, but he says, “it’s a strategic deal, which means that we have a long-term interest in the partnership.”

Four ROR-γt partnerships followed Orphagen’s deal with Japan Tobacco, including Phenex Pharmaceutical’s deal with Janssen Biotech, which could eventually generate as much as $135 million (with the possibility of further international royalties), and Lycera’s deal with Merck that could total $300 million.

Thacher acknowledges those were bigger deals than Orphagen’s, but he doesn’t view deal size alone as a valid measure of value. He contends that the metrics used to measure big pharma don’t apply to a research engine like Orphagen, which operates on a smaller scale.

Instead, Thacher says Orphagen focuses on return on investment, rather than blockbuster licensing deals. With no VC investors, Orphagen’s returns are divided among a very small pool of shareholders, and Thacher says that makes comparisons with other ROR-γt partnerships problematic.

“We can get an earlier partnership, that is financially meaningful because we haven’t put as much money into it,” Thacher says. “It gave us credibility, it gave us cash… and we got a frontline seat to an experienced organization doing drug discovery of its own.” An important consideration in their deal was Japan Tobacco’s chemistry expertise and commitment to advancing the targets.

With the contract signed, Thacher expanded Orphagen’s team to nine and channeled new energy into developing compounds for other orphan nuclear receptors. Venture Capital or angel investment could have taken the ROR-γt compounds to a more profitable stage for licensing, but he says the resources would have been attached to that program, which meant their other candidates would have languished.

In the meantime, Thacher says Orphagen remains open to the possibility of VC or angel investment; “you have to be opportunistic.” The company is currently interested in a deal or partnership to advance their next drug candidate, a potential treatment for retinitis pigmentosa, the inherited, degenerative eye disease. Their molecules bind with an orphan nuclear receptor involved, down-regulating activity of the mutant genes responsible for one form of the disease. Orphagen has funneled cash and resources from the deal with Japan Tobacco into their secondary compounds. “With another $3 million, we should be able to get well beyond the major partnership-generating milestones,” Thacher says. This drug, and another in development for Cushing’s syndrome, also qualify as “orphan diseases,” and are eligible for certain federal incentives.

Orphagen could not have gotten started without government grants, and Thacher believes more should be done, given the economic boost new start-ups can add to the discovery ecosystem. Thacher believes in grants so strongly, in fact, that he is proposing a state asset fund for California, awarding grants for small companies to support early stage research, modeled on the SBIR program that has been successful at the Federal level. States such as Pennsylvania, Massachusetts, and Connecticut already have programs in place, and Thacher believes California state program would help San Diego thrive, where such technology and entrepreneurial expertise is abundant.

In the end, though, Orphagen’s exit strategy remains uncertain. Their small business model, is “scalable,” Thacher says, “but not rapidly scalable,” and growing for the sake of growth does not appeal to him. He says it would compromise their inventive advantage.

In the meantime, Thacher represents the biggest survival factor for the company— combining entrepreneurship, scientific skill, and the ability to make-do with the variable resources on hand. Through his leadership, Orphagen has shown that small biotech companies can punch above their weight, though on a smaller scale that rarely makes the news. Perhaps more importantly, Orphagen has potentially discovered some novel drug candidates, which is hugely valuable for the pharmaceutical pipeline.